Trends And Outlook For Sandwich Franchises Released

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April 25, 2001

Scottsdale, Arizona-The $56.1 billion sandwich segment,
which began as a U.S. trend and revolutionized the way the world
eats, continues to be fiercely competitive. Chain restaurant
operators, fast-food operators in particular, have taken extensive
steps to enhance company sales and earnings. These steps include
continued domestic and international expansion, expansion into
nontraditional locations (i.e., McDonald's opening units in
Wal-Mart), co-branding, promotions and new product instructions.
NPD ReCount states the sandwich segment increased by 2.2 percent to
114,284 units in 2000, vs. 111,796 in 1999. Five out of the top 11
sandwich chains (Burger King, McDonald's, Sonic, Subway,
Wendy's) had increases in more than 150 units, while three in
that top 11 (Dairy Queen, Hardee's, Taco Bell) closed
units.

Foremost among ways to deal with domestic competition is to
expand internationally. The near saturation of the U.S. fast-food
market has led larger franchise chains to devote greater resources
to international expansion. Over the past few years, Europe has
been in fast-food turmoil: The UK is experiencing an American
invasion and France is retaliating. However, in 2000, even more
turmoil occurred as Mad Cow disease was identified in various
European countries. McDonald's leads the pack in the race to
become the dominant overseas chain, with unit growth of 11.2
percent versus 1.4 percent unit growth domestically in 2000. Plans
for next year include adding about 1,700 restaurants systemwide,
with about 90 percent outside the United States. In January 2001,
McDonald's bought a 33 percent stake in Britain's Pret a
Manger, which serves sandwiches, snacks and sushi at lunchtime.
McDonald's investment will fund Pret a Manger's
international expansion into the United States. Meanwhile, Burger
King and Arby's recently signed its largest international
agreement for 102 new units in England over the next 10 years.
Outside Britain, Burger King is targeting many other countries,
while Dairy Queen remains large in Thailand and Canada and is
deciding whether to go into China. Sonic is expected to open its
first international location in Mexico in 2001. Burger King
completely exited France in 1998.

Co-branding allows brands to cash in on different concepts'
daypart strengths and continues to gain in popularity among
fast-food operators. Allied Domecq, parent company of Dunkin'
Donuts, Baskin-Robbins and Togo's, profits on each
concept's daypart strength by combining them all under one roof
in a trombo unit. While Allied does not expect to sell sandwiches,
ice cream and donuts to the same people, it does intend to exploit
each concept's daypart strength to the point of a continuous
12-hour offering. The company not only wishes to attract
customers-it also wishes to attract franchisees. Trombos allow
franchisees to increase sales and leverage real estate space,
employees, management costs and other resources by creating a brand
cluster that draws customer traffic throughout the day, instead of
single dayparts. On a smaller scale, Wall Street Deli is engaging
in co-branding with Taco Bell express.

Another device used in the fast-food segment in 2000 was image
revamping. Burger King continued its image conversion, which
includes a new logo, a new cooking platform, renovated exteriors
and interiors, new uniforms and improved drive-thru service.
However, in the second half of 2000, Burger King had double-digit
sales declines, which may have encouraged other major chains to
renew focus on sales growth and image upgrades. Burger King faced
many challenges, including new management, changing ad agencies,
Pokemon ball recalls, trouble with Chick-fil-A and potential
boycotts.

There was no shortage of new product development in the sandwich
segment in 2000. The biggest player in this segment,
McDonald's, unveiled several new items, made easier since the
$180 million rollout of its "Made for You" kitchens. The
customized system makes preparing products much faster. The quest
for hot new products is part of a $400 million "brand
reinvention program" kicked off by its new advertising slogan:
"We love to see you smile." Besides new products
introduced at select locations, including the Grilled McVeggie
sandwich, three new chicken sandwiches, Fruit 'n Yogurt
Parfait, McFlurry dessert, breakfast bagel sandwiches and the
McShaker Salads, about 40-odd ideas are in various testing stages.
Throughout the 1990s, McDonald's had little in the way of
successful new products; the last new blockbuster product was
Chicken McNuggets in 1982. One product that did not fair well was
the Big Xtra, which McDonald's planned to phase out in early
2001 in favor of the Big 'N Tasty sandwich, which has been
very successful in its test markets. In addition, McDonald's is
presently testing a new vertical grill, which permits faster cook
times for burgers, and a fryer that cuts the time it takes to cook
french fries in half.

In fall 2000, Burger King, the second largest burger chain,
rolled out its eight-item BK Cravers line that includes mozzarella
sticks, jalapeno poppers and snack size sandwiches as a permanent
menu addition. Burger King is using the new finger-food line to
reposition its Great Tastes value menu launched in 1998. Burger
King recommends that each Craver item be sold for 99 cents. To
further fuel its competition with McDonald's, Burger King plans
to roll out yet another new french fry. After the failure of its
co-called "Perfect Fry," launched in 1998, due to
inevitable mistakes in the 19-page recipe, the chain has redesigned
its fries and its salt applicators.

In May 2000, Arby's launched a similar appetizer menu with
its introduction of mozzarella sticks, onion petals and fried
jalapeno bites. Referred to as Sidekickers, the line is promoted as
the same quality offered at casual dining chains, rather than
playing up its value price like Burger King. In October 2000, in an
attempt to entice adults, Arby's rolled out its "Market
Fresh" sandwiches-upscale sandwiches featuring a choice of
roasted beef, chicken, ham or turkey on thick-cut honey-wheat
bread. By focusing on the adult market, the chain is trying to
position itself above the traditional fast-food battle, where
chains fight for the same youth dollars.

Meanwhile, Subway announced the rollout of its reformulated
Italian wheat bread, promoting "the better the bread, the
better the sandwich." In keeping with Subway's commitment
to offer a healthful alternative to fattening fast food, there has
been no significant change in the nutrients in the bread. In fact,
the total carbohydrate content went down by one gram in the
six-inch Italian bread and by three grams in the six-inch wheat
bread. The chain is promoting its health aspect, heavily relying on
Jared, the man who lost 235 pounds, to successfully draw customers.
In 2000, Subway increased sales per unit by 17.9 percent to
$314,900, thus increasing systemwide sales by 18.8 percent to $3.8
billion.

Other techniques to raise earnings by fast-food operators in
2000 include stock repurchases (Arby's, Wendy's) and
domestic expansion (Arby's, Burger King, Del Taco). Other
operators used value means to entice money-strapped customers
(Burger King, Jack in the Box, Taco Bell, Wendy's), and still
others improved drive-thru times and menu-order screens to confirm
orders to entice time-strapped customers (Burger King,
Wendy's). Finally, Wendy's expanded its late-night
business, which began in 1998, into more units with increased
national advertising. Late-night success is responsible for
one-third of Wendy's same-store sales growth. -Franchise
Finance Corporation of America